Earnings growth across Australian companies for 2015/16 looks like being negative for a second year running for the looming profit reporting season but results may be better than was expected a few months ago.
Analysts are forecasting full-year earnings for the top 200 Australian companies to decline by an average eight to 10 per cent on the previous year, weighed down by the collapse in commodities prices.
The position has improved since April, however, courtesy of a lift in both materials and energy prices and overall business conditions now rated slightly above average.
"For Australia, earnings finally seem to be bottoming as the FY16 declines passes. Our real-time tracker of earnings is pointing to moderate future earnings growth as the drag from commodities abates," Deutsche Bank strategist Tim Baker said ahead of the August results season.
The uptick in commodity prices could turn out to be positive for resource companies earnings, but continuing challenging conditions in other sectors will likely be reflected in the earnings for banks, engineering companies and global manufacturers.
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"The most telling indicator that things are not as bad as people thought is the relative lack of profit warnings in the past few weeks. There have been very few," Bell Potter's head of research services Peter Quinton said.
Analysts at Citi support that view, saying they expect more companies to surprise positively than negatively.
Favourable conditions and success in cost reduction in the case of resource companies, a housing construction boom, and still-solid household spending are factors that could boost prospects for many resources and consumer-focused companies.
Sectors such as transport, general retailing and diversified financials are likely to see weak-to-flat earnings, but the weakness in some consumer-related sectors is probably only temporary, Citi analysts said.
"Heading into results, there seems a reasonable chance the market earnings growth estimates will remain resilient," Citi's head of equity market strategy Tony Brennan said in a report.
Stable earnings prospects aside, both Deutsche and UBS believe the recent run-up in the Australian market means expensive stock prices are leaving little margin for error for many companies.
"The market's recent broad-based run has pushed up valuations and thus the onus on delivery in the upcoming reporting season," UBS strategist David Cassidy said in a client note.
"The reporting season's key risk may be more in the level of prevailing valuations for many stocks than earnings risk per se," he said.
On Friday, the benchmark S&P/ASX200 index was trading above 5,550 points, and has now run up nearly 15 per cent in the last three months.
But others believe that stable growth prospects, combined with steady dividend payouts amid a low-interest environment, will continue to provide support to the market.
"It is all about dividend yield. As long as the dividend yield is well above interest rates, the market valuations will remain strong," Bell Potter's Mr Quinton said.
